U.S. companies are finally listening to stock and bond investors that have been pressing corporations to cut their debt loads.
General Electric is selling its biopharmaceutical business to Danaher Corp. for more than $21 billion, and using the money to pay down borrowings. Kraft Heinz Co. said last month it was slashing its dividend and using the proceeds of asset sales to reduce its liabilities. Randall Stephenson, AT&T’s chief executive, said in January that the company’s top priority in 2019 is to lower its debt.
Plans like these are good news for bondholders who have spent years watching these companies borrow ever more to finance moves like acquisitions that are designed to boost share prices, said Brian Kennedy, a senior portfolio manager at Loomis Sayles & Co.
“They’re in credit repair mode and going full force at this,” said Kennedy, whose firm managed around $250 billion at the end of December.
The steps that companies are taking could mean that the credit meltdown that many banks and investors are bracing for — JPMorgan Chase said on Tuesday that its lending growth should slow as a recession grows more likely — could be relatively tame.
Stock and bond investors often pressure a company in different directions: Equity money managers usually want more risk taking and borrowing to improve profit growth. Debt investors typically press for more measured growth and fewer share buybacks, to ensure that cash flow remains strong relative to debt obligations.
But that’s changing, said Tom Murphy, head of investment-grade credit at Columbia Threadneedle Investments.
“Now the interests are much more aligned,” Murphy said. “It’s about generating profitable growth, not growth for growth’s sake.” When G.E. announced its asset sale to pay down debt on Monday, its shares jumped and risk premiums on its bonds narrowed.
Repairing credit may be overdue. There’s more than $5.2 trillion of U.S. investment-grade corporate bonds outstanding, according to data compiled by Bloomberg, a figure that has grown by more than $3 trillion over the past decade. As debt has grown, it’s become riskier: Around half of blue-chip corporate bonds are in the tier just above junk, while in the early 1990s that level was closer to 27 percent.
It’s not just debt investors that are alarmed either. Equity investors have been flocking to companies with less debt on their balance sheet as well.
Smith writes for Bloomberg News.